Reports & Studies

This is an archival or historical document and may not reflect current policies or procedures.

1948 Advisory Council

1948 Advisory Council
Report--Old-Age and Survivors Insurance

RECOMMENDATIONS ON COVERAGE

1. Self-Employment

Self-employed persons such as business and professional people, farmers,
and others who work on their own account should be brought under coverage
of the old-age and survivors insurance system. Their contributions should
be payable on their net income from self-employment, and their contribution
rate should be 1.5 times the rate payable by employees. Persons who earn
very low incomes from self-employment should for the present remain excluded

The self-employed--business and professional people, farmers, andothers who work on their own account--represent more than one-third
of all persons in jobs now excluded from coverage and constitute by far
the largest single group denied the protection of the system. They include
about 6 million persons in urban self-employment and perhaps 5 million
farmers, though the number of individuals actively engaged in farm operation
as a business is probably only about 3.5 million. {2}

{2} The census figures on farm operators include many
persons who are principally engaged in other kinds of employment or are
retired persons, disabled persons, people of independent means, and operators
dependent on the wage income of someone else in the family group.

The desirability of extending coverage to the self-employed has long been
generally acknowledged. Their need for the basic protection afforded by
old-age and survivors insurance is as great as that of the groups now
covered and, like persons in all other excluded groups, they move back
and forth between covered and non-covered work. The Advisory Council of
1937-38 recommended extension of coverage to the self-employed as soon
as administratively feasible plans could be worked out; since then, the
issue has been largely one of administration.

The fact that almost all full-time and a large proportion of part-time
self-employed persons have for the last few years been required to file
income-tax returns has radically changed the outlook for extending coverage
to this group. It has been demonstrated that income reports can be obtained
from the great majority of the self-employed, and it is now apparent that
the coverage of the insurance system can be extended to them by tying
in a self-reporting system for social insurance with the income tax. Certain
items now reported for income-tax purposes can be used as the contribution
base for old-age and survivors insurance and entered on a social-security
report form. In the main, these items are net income from a business,
profession, or farm (schedule C of the Federal income-tax return), and
from partnerships, syndicates, etc. (schedule E).

If the contribution base for the self-employed is to be strictly comparable
to that for the groups now covered, only the net income from self-employment
attributable to personal services should be taxable. We believe, however,
that this refinement would be administratively impossible. The contribution
base for the self-employed can readily exclude certain types of income
which are obviously not work-connected, such as dividends, interest, annuities,
capital gains and losses, and some types such as rental income from real
property that largely arise from capital investment. Each dollar of income
from typical self-employment such as retail trade or a profession or farming,
however, is income derived partly from personal services and partly from
capital investment, combined in such a way as to make any separation virtually
impossible.

For many persons with relatively high income from a business,profession, or farming, the failure to make the distinction between
income from personal services and income from investment will be of little
significance, since that part of their income (the first $4,200 a year
of net income) on which they will pay contributions may be presumed to
be derived from personal services. Self-employed persons with lower incomes
who yet have substantial capital invested in their business, however,
will get higher benefits and pay more in contributions than they would
if it were possible to tax only their income from personal services.

One of the reasons for our recommending that self-employed persons contribute
at a rate of 1.5 times the employee-contribution rate rather than at the
combined rate for employer and employee is the fact that some of them
will be paying on income from capital investment as well as on income
from personal services. Moreover, if they were required to pay twice the
normal employee rate, the high-income self-employed persons who contributed
over a long period might be "overcharged" for their coverage
in relation to what they would have to pay for comparable protection under
private insurance. The later retirement age which characterizes the self-employed
will lengthen their contribution period; reduce the number of years they
receive retirement benefits, and result in savings to the trust fund.
As a reasonable compromise, we recommend that the self-employed person--who
is at once his own employer and employee--should contribute at 1.5 times
the employee rate.

The Council believes that, at the outset, extension of coverage to the
self-employed should be limited to those at income levels to which the
requirement for filing Federal income-tax returns has applied,i.e., those with gross annual incomes of at least $500. We therefore
recommend exclusion of those whose self-employment yields gross income
of less than $500 or a net income of less than $200. Setting a minimum
net income for coverage in addition to a minimum gross income will prevent
a large volume of returns from persons who earn so little from self-employment
that they could not qualify for benefits. This exclusion will avoid reporting
with respect to inconsequential amounts of income and will avoid collecting
contributions at an expense out of all proportion to the benefits afforded.

We advocate limiting coverage to those who have been required to file
income-tax returns in the past. The coverage of the old-age and survivors
insurance system should not vary with changes in the income-tax exemption.
The Treasury Department should require returns for social-security purposes
from anyone who has a gross income of $500 or more and net income of at
least $200, regardless of changes in income-tax requirements.

The application of a retirement test for the self-employed presents special
and difficult problems.This is one of the reasons for
the recommendation in proposal 19 that benefits be paid at age 70 or over
without reduction for earnings. Since many self-employed persons remain
at work until at or near age 70, the application of the retirement test
only to beneficiaries under that age will avoid the need to make many
of the more difficult administrative determinations connected with such
a test. The work clause for those between 65 and 70 will, of course, have
to be modified for the self-employed in view of the fact that their income
will be reported annually.

2.Farm Workers

Coverage of the old-age and survivors insurance system should be
extended to farm employees

During the course of a year about3.5 million agricultural
workers are excluded from old-age and survivors insurance. The social
desirability of extending coverage to these workers has long been a matter
of common agreement, and it is now evident that administrative considerations
no longer constitute an important barrier to their receiving the protection
of the system. The Treasury Department and the Social Security Administration
have developed plans which the Council believes are workable, although
reporting problems may be difficult in the early years.

The Treasury Department in cooperation with the Social Security Administration
should be left free to select the method of collecting contributions for
these workers. Although we believe that either the stamp system or some
modification of the present reporting plan would be practicable, we believe
that it would be a mistake at this point to stipulate the exact method
to be used and thus preclude further study by the agencies concerned.

Wages credited toward benefits should include wages-in-kind, when substantial.
Without credits for wages-in-kind, many farm workers would be ineligible
for benefits, and the benefit amounts for which many others could qualify
would be very small. Although evaluating wages-in-kind may prove difficult
at the outset, the same type of problem is now being met satisfactorily
for groups covered under the present system. Wage credits of workers in
restaurants, hotels, and cafeterias and of maritime workers' building
superintendents, and resident managers, among others, already include
wages-in-kind. Minimum presumptive schedules setting the value of the
more important types of wages-in-kind, such as regular meals and lodging,
might be of assistance to farm workers and their employers in reporting
wages. Inconsequential facilities or privileges, which might create a
reporting nuisance out of all proportion to their significance, should
be excluded.

3. Household Workers

Coverage of the old-age and survivors insurance system should be
extended to household workers

The 2.5 million persons who work in household employment during the course
of a year should be covered under old-age and survivors insurance. They
need social insurance protection fully as much as does any other group,
and the Council believes that it is now administratively feasible to extend
protection to them.

Though there was ample reason at the outset to postpone undertaking the
special problems of including household workers in the system, the administrative
agencies are now in a position to deal adequately with these problems.
A strong argument for the delay was the difficulty anticipated in collecting
wage reports and contributions from the employers of domestic workers.
Since employers may be expected to outnumber employees in this area, the
relatively high costs and administrative problems generally associated
with obtaining reports from small employers will be heavily concentrated
here. The Social Security Administration and the Treasury Department,
however, have now had 11 years of experience in collecting wage reports
and contributions from small employers, and the administrative machinery
of the insurance system functions satisfactorily for these small establishments.
In the first quarter of 1946, for example, employers with only one employee
represented one-fourth of the total number who reported for purposes of
old-age and survivors insurance.

In the early years of coverage for household workers, some difficulties
may arise from delinquency in the payment of contributions and from incomplete
understanding of the program by household workers and their employers.
We believe, however, that these problems can be solved fully as effectively
and quickly as were the very considerable problems met when the present
program was started.

As we indicated with respect to farm workers, we believe that, for household
workers, substantial wages-in-kind in the form of meals and lodging should
be reported and recorded as wage credits, but that wages-in-kind of relatively
small value should be disregarded. As in the case of farm workers, also,
the administrative agencies concerned should be left free to decide on
the methods to be used for collecting wage information and contributions.

4. Employees of Nonprofit Institutions

Employment for non~profit institutions now excluded from coverage
under the old-age and survivors insurance program should be brought under
the program, except that clergymen and members of religious orders should
continue to be excluded{3}

{3} Two members of the Council favor extension of
coverage to the nonprofit group on an elective basis for reasons given
in appendix I-E.

Approximately a million employees of nonprofit organizations are at present
denied the protection of the old-age and survivors insurance program.
Almost half are in the service of charitable organizations, one-fourth
are in educational institutions, and another fourth work in religious
institutions. These employees include not only professional persons such
as nurses, teachers, and clergymen, but also office workers, laboratory
assistants, janitors, and maids.

The extension of coverage to employees of nonprofit organizations presents
no administrative difficulties and the need for old-age and survivors
insurance protection of these workers and their families is as great as
for workers who are now covered. Especially when they work in nonprofessional
jobs, the tasks and earnings of employees of nonprofit organizations,
as well as the extent to which they move from one job to another, are
equally characteristic of industrial and commercial workers.

Probably not more than two-fifths of the employees of nonprofit organizations
are covered by any formal retirement plan and very few of such plans extend
protection to survivors. Moreover, in general, the right to pensions from
the private plans is contingent on long periods of service, hence, persons
who transfer from one nonprofit organization to another or between nonprofit
and other organizations, may forfeit all retirement rights.

Although many clergymen are covered by retirement programs, in some denominations
the lower-paid clergymen do not participate, while benefits for those
who do are often inadequate; more serious, however, is the fact that few
lay employees of churches have any assurance of economic security in their
old age through staff pension plans. Not more than half the college teachers
of the Nation actually participate in retirement systems, and in private
colleges most such systems do not cover non-teaching personnel. Coverage
under old-age and survivors insurance can and should be effected for teachers,
employees of charitable and scientific organizations, and lay employees
of churches, without impairing any of the rights which individuals may
have built up under private systems.

Leaders of religious, charitable, scientific, and educational organizations
apparently agree on the desirability of providing protection under old-age
and survivors insurance for employees of these institutions. Some, however,
have feared that an extension of the compulsory insurance system to employment
for religious institutions might impair religious freedom by undermining
the principle of the separation of church and state. Others evidently
feel that a tax on employers under the Federal Insurance Contributions
Act would tend to weaken the traditional tax-exempt status of such institutions.

The members of the Council are unanimous in believing that freedom of
religion should be protected, but we are convinced that a tax on employment--a
function which employers in the nonprofit area have in common with all
others--for the special purpose of giving equal social insurance protection
to all employees would in no way imply or lead to Government control over
the performance of the religious function. To make it absolutely clear
that the legislation is not concerned with the performance of religious
duties, we recommend that persons directly engaged in religious duties,
such as clergymen and members of religious orders, remain exempt from
coverage under the program. Our recommendation would extend coverage only
to lay personnel who perform services which are secular in character.

We also believe that public encouragement of religious, charitable, scientific,
and educational enterprise should be continued through preservation of
the traditional tax-exempt status of such institutions. That encouragement,
however, would be better expressed, we believe, by extending social insurance
protection to their employees than by continuing to deny it. Employers
in the nonprofit field are at a considerable disadvantage in the labor
market because they cannot offer retirement and survivorship protection,
hence, coverage exclusion handicaps these organizations and fails to promote
their services to the community.

Religious, charitable, scientific, and educational organizations, which
have been traditionally exempt from taxation on income and property dedicated
to the purposes which the community wishes to promote, can and should
continue to enjoy their traditional tax exemption when the old-age and
survivors insurance program is extended to their employees. It has long
been customary to require such institutions to pay certain types of special
assessments for property improvement, to pay Federal excise taxes, and
in some States to pay the local and State taxes on commodities which they
use. Even in some States with exclusive State funds, they have been required
to carry workmen's compensation insurance. The use of Government compulsion
in connection with these special taxes and levies has not led to taxation
on the property and general income of these institutions. Moreover, many
organizations such as trade-unions, trade associations, fraternal and
beneficial organizations, and the like, which are exempt from the Federal
income tax and certain other taxes, pay the old-age and survivors insurance
contribution without appearing to be in danger of losing their exemptions
under other laws.

Old-age and survivors insurance levies a special-purpose tax on the function
of employment. The proceeds are automatically appropriated to a trust
fund dedicated to benefits for those who have contributed. It has always
been clear that it is a special kind of tax which should not serve as
a precedent for other forms of taxation any more than would a special
assessment levied by a local government. We believe, however, that Congress
should indicate its intent that the taxation of nonprofit organizations
for old-age and survivors insurance in no way implies a departure from
the principle of promoting the function of these organizations through
tax exemption, and that a major reason for extending protection to this
area of employment is to assist these institutions in fulfilling their
purpose.

5.Federal Civilian Employees

Note.--The enactment of Public Law 426 by the Eightieth Congress
has strengthened and improved the Civil Service Retirement Act. Some 500,000
Federal workers {4} remain outside the coverage
of any retirement system, however, and neither retirement nor survivorship
protection is afforded Federal employees with less than 5 years of service.
Estimates developed from prewar employment figures indicate that, in general,
only about 60 percent of all persons entering Federal service remain for
5 years or more.

{4} This figure includes an unknown number of foreign
nationals.

Persons who leave Federal service after having been employed for as much
as 5 years but less than 20 years may elect to withdraw their contributions
instead of accepting a deferred annuity. When they so elect, they lose
all retirement protection under the Civil Service Retirement Act. Whatever
survivorship protection an individual may have acquired under the civil-service
plan lapses as soon as he leaves the Federal service.

Old-age and survivors insurance coverage should be extended immediately
to the employees of the Federal Government and its instrumentalities who
are now excluded from the civil-service retirement system. As a temporary
measure designed to give protection to the short-term Government worker,
the wage credits of all those who die or leave Federal employment with
less than 5 years' service should be transferred to old-age and survivors
insurance. The Congress should direct the Social Security Administration
and the agencies administering the various Federal retirement programs
to develop a permanent plan for extending old-age and survivorsinsurance to all Federal civilian employees, whereby the benefits
and contributions of the Federal retirement systems would supplement the
protection of old-age and survivors insurance and provide combined benefits
at least equal to those now payable under special retirement systems

The Advisory Council believes that the civil-service retirement system--which
now covers about 1.5 million workers--should be maintained as a supplementary
retirement system because of its importance in furthering the efficient
conduct of the business of government. The civil-service retirement system
performs the function of a private staff-pension plan. For this function
to be performed successfully and for the Government to meet the obligations
created by its compulsory retirement of its employees, benefits larger
than those payable under the general old-age and survivors insurance system
must be provided. Hence, nothing should be done to weaken the Federal
civil-service retirement system.

We are convinced, however, that extension of the coverage of old-age
and survivors insurance to all Federal civilian employees (including those,
other than foreign nationals, who are employed outside the United States)
would strengthen rather than weaken the civil-service system. Such extension
would remedy three major defects in the protection now afforded Federal
employees--the lack of adequate survivorship protection, the lack of continuity
of protection for those who move in and out of Government service, and
the exclusion of many Federal workers from any Government retirement system.

The survivor benefits provided by Public Law 426 (80th Cong., 2d sess.),
while of considerable value for long-term workers, are quite inadequate
for the survivors of workers with relatively short periods of Federal
service. First, no monthly survivor benefits are payable unless the employee
has had at least 5 years' service. Second, survivor benefits are very
small if the employee has had only a short period of service and annual
wages at about the current average. Thus, the widow of a Federal employee
who had 5 years of service and an average annual salary of $3,000 would
receive a monthly payment of about $11, and his child's monthly payment
would be about $6. The Federal employee, like all others, needs survivorship
protection based on the insurance principle of full protection for the
youngworker as well as for the older age groups.

As noted above, persons who leave Federal employment with less than 5
years' service receive only a refund of their contributions to the civil-service
retirement system, while those who leave after 5 years but before 20 years
of service have the option of receiving either a refund of their contributions
or a deferred annuity. Almost 20 percent of all Federal employees leave
in their first year of Government employment and another 10 percent leave
during the second year. According to data developed from prewar histories,
only about one-third stay on to retirement. The time spent in Federal
employment, moreover, reduces the possibility of obtaining adequate protection
under old-age and survivors insurance. Extension of old-age and survivors
insurance coverage to Federal employment would provide continuing protection
for these short-time workers as well as for career employees.

The 500,000 persons who are now working for the Federal Government in
civilian jobs and who are not covered by any Federal retirement program
represent nearly one-fourth of the total of all Federal employees. The
group includes some postal workers, and certain temporary, part-time,
contract, and pieceworkemployees.

Pending the development of a suitable plan, recommended by the agencies
concerned, for extending old-age and survivors insurance coverage to all
employees (except foreign nationals) and congressional action on such
general extension, coverage should be extended immediately to the employees
of the Federal Government and its instrumentalities who are not now covered
under any system. Old-age and survivors insurance coverage would be particularly
valuable to many employees in this group because they are temporary or
part-time workers who may ordinarily work in employment now covered under
old-age and survivors insurance.

In addition, we advocate some immediate provision for the employee whose
Federal service is too short to furnish protection under the civil-service
retirement system, even though he is covered by that system. Accordingly,
as a temporary measure, pending complete extension of coverage to all
Federal workers, we recommend that-- when separated from Federal service,
whether by death, resignation, or dismissal before having served for 5
years--the Federal employee receive appropriate wage credits under old-age
and survivors insurance for his Federal service.

When the employee leaves the service, he should receive a refund of his
contributions to the civil-service retirement system, less an amount equal
to the employee contribution which he would have paid on his wage credits
if he had been contributing toward old-age and survivors insurance. The
latter amount should be transferred to the Federal Old-Age and Survivors
Insurance Trust Fund, and this transfer of credits and contributions should
be irrevocable. In addition, the Federal Government, through an annual
appropriation by the Congress, should pay the old-age and survivors insurance
trust fund the employer's share of the contributions which would have
been collected for old-age and survivors insurance with respect to the
wage credits given for Federal service. To be eligible for full civil-service
retirement benefits if he later returns to Federal service, the employee
should be required, after completing 5 years of total service, to redeposit
the full amount of his previous contributions to the civil service retirement
and disability fund. In some such instances, he will thus have duplicate
credits for the same period of service. In a temporary plan, however,
this duplication does not seem serious, since the employee will have paid
for his credits under each program.

When the employee dies during his first 5 years of service, the old-age
and survivors insurance trust fund should be reimbursed for the cost of
that part of the benefits payable to his survivors which is attributable
to his civil-service wages. This reimbursement should be based on recommendations
by the Civil Service Commission and Social Security Administration as
to the most equitable method for such reimbursement.

This proposal falls short of an adequate permanent solution to the problem.
It does nothing, for example, for persons who, on leaving Federal service
after 5 years, elect to take an immediate refund rather than a deferred
annuity; it also fails to provide survivorship protection for those who
leave Federal service. A temporary measure obviously cannot avoid all
possible situations in which hardship may develop. The measures we propose
are a stopgap to prevent the most glaring anomalies, until such time as
complete old-age and survivorsinsurance coverage of
Federal employees, with appropriate supplementation by the civil-service
retirement system, can be adopted.

6.Railroad Employees

Note.--Like the civil-service retirement system, the Railroad
Retirement Act has recently been substantially revised. The amendments
of 1946 (Public Law 572, 79th Cong.) established survivorship protection
for railroad workers based on a combination of their earnings in the railroad
industry and in employment covered by old-age and survivors insurance,
under eligibility and benefit provisions closely resembling those of old-age
and survivors insurance. No such coordination, however, is provided for
retirement protection under the two programs, hence workers with earnings
from both railroad employment and employment covered by old-age and survivors
insurance, but with only a relatively few years in either one, may receive
considerably lower retirement benefit in relation to their contributions
than they would if all their employment had been covered under one program
or the other. The extent of shifting between the two employment areas
is substantial.

The Congress should direct the Social Security Administration and
the Railroad Retirement Board to undertake a study to determine the most
practicable and equitable method of making the railroad retirement system
supplementary to the basic old-age and survivors insurance program. Benefits
and contributions of the railroad retirement system should be adjusted
to supplement the basic protection afforded by old-age and survivors insurance,
so that the combined protection of the two programs would at least equal
that under the Railroad Retirement Act

The railroad retirement system developed out of special conditions on
the railroads and has a distinctive history. It grew out of, and superseded,
many private pension plans which had existed in the railroad industry,
and through its adoption the protection which formerly had been afforded
to only a limited number of railroad workers was made available to all.
The protection against old age and premature death provided by the railroad
retirement program is generally more liberal than that provided under
old-age and survivors insurance, and long-service railroad workers are
insured against the risk of permanent and total disability. Moreover,
the contributions of the railroad program are considerably larger than
those now payable under old-age and survivors insurance.

While the railroad program provides adequately for the workers who remain
in the industry during their entire working lifetimes, inadequate protection
is given in some instances to those who move between railroad and other
employment. That this movement is very large is indicated by a comparison
of the total number of workers employed by the railroads during a year
with the average number at work at any one time. While average railroad
employment in 1945 was nearly 1.7 million, about 3.1 million individuals
had some railroad earnings during the year. Thus, for every 100 railroad
employees working at a given time in 1945, 183 acquired railroad-retirement
credits in that year; in 1940 this ratio was 100 to 140. During 1937-46
probably about 4,000,000 persons had wage credits under both railroad
retirement and old-age and survivors insurance; this group represents
more than half the workers (approximately 7,000,000) with wage credits
under the Railroad Retirement Act during the 10-year period.

Extension of old-age and survivors insurance to railroad employees would
prevent losses in protection that may now result from these shifts in
employment. It would also prevent the disproportionately high total of
benefits which may result from shifting employment in some cases. Such
cases arise when a higher-paid worker employed for the most part in the
railroad industry, and so eligible for substantial railroad benefits,
acquires enough credit under old-age andsurvivors insurance
to qualify for benefits under that program also and receives the advantage
of the weighting in the benefit formula of the latter program which is
intended to favor lower-paid workers.

The railroad-retirement program gives railroad workers vested rights
in retirement benefits regardless of the length of time they are employed.
Thus, unlike Government employees, employees of nonprofit organizations,
and members of the armed forces, railroad workers are certain to qualify
for at least some benefits under at least one retirement system. Nevertheless,
we believe that employees who spend all or part of their working lives
in the railroad industry should have all their employment credited under
the old-age and survivors insurance program; otherwise, some railroad
workers will contribute substantially toward that program without qualifying
for its benefits. Furthermore, during the early years of the old-age and
survivors insurance program, some persons who work for only a few years
in railroad employment will have less in combined protection than they
would if they had been under old-age and survivors insurance continuously.

If the basic protection of old-age and survivors insurance were extended
to railroad employment, supplementary benefits under the railroad program
would be needed to prevent railroad workers from receiving less retirement
and disability protection than is now available to them. If the survivor
benefits of old-age and survivors insurance are increased as we propose,
they would be higher than survivors benefits under the present Railroad
Retirement Act.

We believe that the basic differences between the structures of the retirement
benefits under old-age and survivors insurance and the Railroad Retirement
Act preclude any coordination short of extending old-age and survivors
insurance coverage to railroad workers and making the Railroad Retirement
Act a supplementary program. In our opinion, a satisfactory plan can be
developed for extending old-age and survivors insurance to all railroad
employees and thus strengthening the protection now afforded railroad
workers. A report on such a plan should be made to Congress at the earliest
practicable date.

Extension of old-age and survivors insurance to railroad employees and
making the railroad system supplementary to old-age and survivors insurance
would result in lower pay-roll contributions by railroad workers and their
employers for the same protection as at present if, as we propose, old-age
and survivors insurance is ultimately financed in part by appropriations
from general revenues.

7.Members of the Armed Forces

Old-age and survivors insurance coverage should be extended to members
of the armed forces, including those stationed outside the United States

Although the career serviceman is eligible for retirement benefits after
20 years of service, the person who spends a shorter period in the armed
forces is seriously handicapped by the fact that his military or naval
service is not covered under old-age and survivors insurance.

At his death his survivors may not be eligible for any benefits, since
protection of peacetime servicemen under the programs for veterans ceases
immediately on discharge from service; while if he lives to retirement
age, he may fail to be eligible for retirement benefits undereither old-age and survivors insurance or one of the special
retirement plans. In other cases, benefits will be payable only under
old-age and survivors insurance and at a greatly reduced rate because
of the time spent in the armed forces. Extension of old-age and survivors
insurance to the armed forces will give continuous basic protection both
to the career serviceman and to those with shorter periods of military
or naval service.

We believe that an adequate staff system affording retirement and survivorship
protection for peacetime servicemen is essential to maintaining a strong
and efficient military establishment. Although benefits payable under
service retirement systems and the programs for veterans should be adjusted
to supplement the basic benefits payable under old-age and survivors insurance,
nothing should be done to weaken the military staff retirement system.
The combined protection under the various programs should at least equal
that afforded servicemen at present.

Wage credits under old-age and survivors insurance for personnel of the
armed forces should represent the amount of remuneration actually received,
including the cash value of perquisites and the amount of allowances to
the extent that such perquisites and allowances can be regarded as remuneration
for services performed. Perquisites furnished and allowances paid solely
in consideration of the serviceman's dependents, however, probably cannot
be so regarded, since they do not vary with the grade of the serviceman
or the type of services performed.

The Federal Government, as the employer, should pay the equivalent of
the employer tax under the Federal Insurance Contributions Act, and the
servicemen themselves should bear the cost of the employee contribution.
Servicemen should have the same interest and stake in the system that
other covered workers have, and the contributory character of the basic
insurance program should be maintained.

8.Employees of State and Local
Governments

The Federal Government should enter into voluntary agreements with
the States for the extension of old-age and survivors insurance to the
employees of State and local governments, except that employees engaged
in proprietary activities should be covered compulsorily

Voluntary coverage of a limited group under an otherwise compulsory social
insurance system is ordinarily undesirable and unwise. Under a system
such as old-age and survivors insurance, in which benefits are not directly
related to the value of the contributions paid, voluntary participation
is likely to result in disproportionately large benefits for those who
elect coverage. Even if voluntary participation is limited to entire groups
of workers, the organizations that elect coverage are likely to be those
in which most employees are persons nearing retirement age or men with
large families. The smaller the organization, of course, the greater the
danger of this "adverse selection."

Because of the apparent constitutional barrier against Federal taxation
of the States, however, coverage of the employees of State and local governments,
except for those engaged in proprietary functions, will have to be on
a voluntary basis unless these government employees are to be denied the
protection of the Federal program. Because of this fact, and because a
clear need exists for old-age and survivors insurance protection of these
employees, the Council believes that a voluntary plan should be offered
to State and local governments in their capacity as employers.

Coverage can and should be extended on a compulsory basis to government
employees engaged in proprietary--as opposed to government--functions
of the employing units. Proprietary activities include, for example, State
liquor stores, municipal subway systems, and other public utilities that
are owned and operated by the government unit. Compulsory extension of
coverage to these groups appears to raise no constitutional questions
and would immediately give 150,000 to 200,000 workers the advantages of
basic social insurance protection.

Under a voluntary system, adverse selection occurs when coverage is elected
by only a part of the total employee group and that part is not representative
of the entire group. Such selection can be controlled to some extent by
restricting the employer's latitude of choice in determining coverage
of the plan. The Council, therefore, recommends that coverage be permitted
only when elected for all employees within an occupational or departmental
group. Thus, when coverage is extended to a government department, bureau,
or other administrative division of the State or of a locality, all employees
of the department would have to be covered. If coverage is extended to
an occupational group, all employees of a State or of a local government
unit who are engaged in the specified type of work (such as teachers,
typists, truck drivers, janitors) would have to be covered.

As further assurance that the covered group will contain a reasonably
representative distribution of risks, coverage should be permitted only
if one-fourth of the employees of the State or local government (such
as a county, township, municipality, or school district) are brought into
the program. This requirement would probably be adequate for the larger
local government units, but a more restrictive one is recommended for
localities with less than 400 employees. If the locality has less than
400 but more than 100 employees, coverage would have to be elected for
at least 100 employees. If the local government unit has 100 or fewer
employees, all would have to be covered.

It is recommended that agreements be entered into only with States, although
political subdivisions of the State should be permitted to participate.
A State entering into an agreement would assume the responsibilities of
an employer under old-age and survivors insurance; that is, the State,
both for itself and for those of its political subdivisions which participate
in the agreement, would collect and transmit to the Federal Government
wage information and contributions. The fact that the Federal Government
would deal only with the States would greatly reduce an otherwise heavy
administrative burden. Since the agreements would be voluntary, no question
of the Federal right to levy a tax on States and localities would be raised.

As of April 1947, nearly 4,000,000 employees of States, political subdivisions
of States, and instrumentalities of State and local governments were excluded
from old-age and survivors insurance. The average earnings of these employees
as a rule are somewhat lower than those in private industry. The average
monthly salary during April 1947 was $160 for non-school employees and
$185 for school employees as compared with an average monthly wage of
about $205 in manufacturing industries.

Almost half the total number of State and local employees are not covered
under any retirement system, and of those who are so covered, probably
about four-fifths lack adequate survivorship protection. The need of this
group for the protection of the old-age and survivors insurance program
is clear. An equally important reason for extending old-age and survivors
insurance to employees of State and local governments is to give public
workers continuous protection when they shift from one government unit
to another, or between government units and private industry. Existing
State and local staff retirement systems are designed primarily for those
who continue in the service of the particular unit until their retirement;
the majority of those who leave the service before retirement age normally
forfeit any rights to retirement benefits they may have acquired. Similarly,
persons who enter government employment from private industry may lose
all or part of the protection they have acquired under old-age and survivors
insurance.

Although jobs in State and local government agencies are more stable
than in many areas of private industry, there is nevertheless a substantial
turn-over. In April 1946, a typical month, 3.4 million persons were employed
by State and local governments, while during the whole year about 4.3
million were so employed. Thus, several hundred thousand had temporary
employment in these units, or shifted from permanent government jobs to
work in other fields. In 1944, about one-seventh of all non-school employment
for State and local government units was on a part-time basis and about
one-eighth of all State and local employment was temporary. Even for the
permanent, full-time jobs, the annual turn-over probably ranges from 4
to 7 percent.

Many proposals previously advanced for covering these workers have advocated
excluding, on either a permissive or a mandatory basis, various limited
groups of State and local employees, apparently in fear that coverage
under old-age and survivors insurance would weaken or even completely
destroy their State and local retirement system. As pointed out in the
Council's recommendations for coverage of Federal and railroad employees,
retirement systems supplementary to old-age and survivors insurance perform
a valuable and necessary function. When coverage is extended to State
and local employees who are members of staff retirement systems, those
systems can be adjusted to supplement the basic old-age and survivors
insurance benefits. Private employers have demonstrated that such adjustments
can be made satisfactorily and without any loss in total retirement protection.
The Council believes that in light of (a) the incontrovertible merit of
the retention and development of supplementary plans, (b) the fact that
employees under industrial pension systems did not suffer losses in benefits
attributable to adjustment to the old-age and survivors insurance program,
and (c) the fact that State and local governments have recognized the
need for, and taken action to provide, retirement protection for their
employees, any fear that the availability of old-age and survivors insurance
will lead government units to reduce the total protectionafforded
their employees is unjustified.

9.A Study of Social Security
Protection for the Possessions of the United States

A commission should be established to determine the kind of social
security protection appropriate to the possessions of the United States

The social insurance and public assistance provisions of the Social Security
Act do not at present apply to Puerto Rico, the Virgin Islands, Guam,
or other possessions of the United States, even though the livelihood
and security of the people of such possessions are bound up with the United
States economy. The kind of social security protection to be afforded
to these people should be based on detailed studies of economic and social
conditions in the islands. Matters that require investigation include
wage rates, regularity of employment, extent of unemployment, incidence
of illness, and the nature of public assistance and public-health provisions
now administered by the insular governments.

The extended inquiry which would be called for, particularly since areas
outside the continental United States are involved, is believed by the
Council to be beyond its function. For this reason the Council proposes
that a special commission be established to make such inquiry and recommend
appropriate social security legislation. The commission should represent
the general public, including residents of the possessions, as well as
agencies such as the Federal Security Agency and the Departments of Labor,
Agriculture, Interior, Commerce, and Treasury, which either have a special
interest in the islands or would normally concern themselves with the
problems at issue.

10.Inclusion of Tips in the
Definition of Wages

The definition of wages as contained in section 209 (a) of the Social
Security Act, as amended, and section 1426 (a) of subchapter A of chapter
9 of the Internal Revenue Code should be amended to specify that such
wages shall include all tips or gratuities customarily received by an
employee from a customer of an employer

Tips or gratuities paid directly to an employee by a customer of an employer,
but not "accounted for" by the employee to the employer, are
not now included in wages as defined for benefit and contribution purposes.
Only a small part of all tips are now accounted for. Consequently, substantial
numbers of workers in such service industries as hotels, restaurants,
barber shops, and beauty parlors are denied the degree of protection they
would acquire if all such payments were included in their wage records.
Some workers may fail to qualify for benefits because, except for tips,
their remuneration is inconsequential. This condition is especially illogical
since tips are frequently contemplated in the wage contract, are earned
in theservice of the employer, and are received for
services generally recognized as performed in the interest of the employer.

Tips are included in taxable income under the Federal income-tax law.
Moreover, in about half the States, such payments are reported under the
State unemployment insurance laws on a more inclusive basis than under
the program of old-age and survivors insurance

Estimates indicate that full inclusion of tips and gratuities would sharply
increase the wage credits of approximately a million workers now covered
by the old-age and survivors insurance program. The increase for roughly
two-thirds of that number would amount to about 40 percent of their wages
as reported under present interpretation of the law. According to Department
of Commerce estimates, $183,000,000 was paid in tips in 1939; $196,000,000
in 1940; $238,000,000 in 1941; $308,000,000 in 1942; and $336,000,000
in 1943. If a similar rate of increase continued after 1943, as seems
likely during years of high prices, the total amount now paid in tips
might well exceed half a billion dollars a year. The inclusion of such
additional sums in the wage credits of approximately a million workers
in covered service industries would clearly have an important effect on
their benefits rights and their contributions to the trust fund.

In the absence of an exact reporting of tips by persons receiving them,
it would be possible to permit employers to report a reasonable estimate
of the tips received by their employees, as is now done under some of
the State unemployment insurance laws. In making such estimates, the employer
would take into account the volume of business handled by the employee,
the tips reported by other employees, the type of establishment, and any
other pertinent factors. The employer should not be held responsible for
any inaccurate reporting of tips by his employees, however, and should
be protected from penalties on this account. Procedural and administrative
questions could be settled by appropriate regulations designed to implement
the intent of the law.

Adoption of this recommendation, the Council believes, would bring the
contributions paid and the benefits received by a large number of people
more nearly in line with their actual earnings, thus ending an inequity
to persons whose employment is covered by the program but who receive
much of their remuneration for such employment in a form not now considered
wages. It would also result in greater uniformity in interpretation of
wages in laws relating to income taxes, unemployment insurance, and old-age
and survivors insurance.

RECOMMENDATIONS ON ELIGIBILITY

11. Insured Status

To permit a larger proportion of older workers, particularly those
newly covered, to qualify for benefits, the requirements for fully insured
status should be 1 quarter of coverage {5} for
each 2 calendar quarters elapsing after 1948 or after the quarter in which
the individual attains the age of 21, whichever is later, and before the
quarter in which he attains the age of 66 (60 for women) or dies. Quarters
of coverage earned at any time after 1936 should count toward meeting
this requirement. A minimum of 6 quarters of coverage should be required
and a worker should be fully and permanently insured if he has 40 quarters
of coverage. In cases of death before January 1, 1949, the requirement
should continue to be 1 quarter of coverage for each 2 calendar quarters
elapsing after 1956 or after the quarter in which the age of 21 was attained,
whichever is later, and before the quarter in which the individual attained
the age of 65 or died

{5} As under the present program, a calendar quarter
in which the worker has $50 or more in earnings from covered employment.

The Council recommends a "new start" in the eligibility requirements
which will require the same qualifying period for an older worker now
as was required for a person who was the same age when the system began
operation. All workers who will have attained age 62 before the middle
of 1949 would be insured with the minimum of 6 quarters of coverage, just
as workers of the same age in 1937 could be insured with the minimum number.

A major reason for the fact that the old-age and survivors insurance
program has been slow in replacing public assistance as the chief method
of meeting income loss in old age is the difficulty which older people
face in meeting the present eligibility requirements. Eleven years after
the inauguration of the program only about 20 percent of the population
aged 65 and over is either insured under the program or receiving benefits.

Eligibility requirements for the older workers as difficult to meet as
those of the present program (24 quarters of coverage will be required
under present provisions for those attaining age 65 in the first quarter
of 1949) mean an unwarranted postponement of the effectiveness of the
insurance method in furnishing income for the aged. In a contributory
social insurance system, as in a private pension plan, workers already
old when the program is started should have their past service taken into
account. The unavailability of records of past service prevents giving
actual credits under old-age and survivors insurance for employment and
wages before the coverage becomes effective, but eligibility requirements
and the benefit formula can and should take prior service into account
presumptively. To pay benefits to all the current aged--including those
who have not worked at all since the inauguration of the system might
endanger the character of the benefit based on contributions and work
records, but in getting the system started, it is important to make due
allowance for those who, because of age, will probably continue at work
for only a short period.

All persons who reached age 62 before the middle of the year in which
the system began to operate (1937) could be fully insured under the present
act if they acquired six quarters of coverage. Those who attained age
62 in the third or fourth quarters of 1937 needed 7 quarters, and so on,
while, as indicated above, those attaining age 65 in the first quarter
of 1949 will need to have had 24 quarters. After 1956, under the present
provisions, all persons who had attained age 21 before 1937 will need
the maximum requirement of 40 quarters.

Unless the present provisions are modified, all persons covered for the
first time in January 1949 who are less than 57 years old will have to
have 10 years of coverage before they can become eligible for retirement
benefits, while even those aged 65 will need six more years of steady
employment before they can receive benefits. A "new start,"
treating those newly covered workers in the same way that the program
treated other occupational groups when they were first covered, seems
reasonable and fair.

While it would theoretically be possible to liberalize requirements only
for newly covered workers and to retain the present provisions for all
others, this is not a practical or desirable solution. Shifts between
covered and non-covered employment are so common that it wouldbe all but impossible to establish a fair criterion for determining,
for the purpose of special eligibility requirements, which individuals
should be treated as belonging to a newly covered occupation. Any liberalization
designed to reduce the handicap of newly covered workers must be a generally
applicable provision.

The Council recommends that the liberalization of eligibility requirements
should apply only to individuals living at the date of coverage extension.
This proposal is consistent with the treatment accorded survivors under
the 1939 amendments when the provisions for survivor benefits were made
applicable only in cases of death after December 31, 1939. Considerable
administrative difficulty would arise if the eligibility for benefits
of individuals who died before the amendment of the law were reconsidered

Of the various possible methods of adjusting the fully insured status
requirement for newly covered workers, the one we recommend seems to us
to offer the advantages of uniformity and simplicity and at the same time
to provide a much-needed liberalization in the requirements for all older
workers. It would also reduce the disadvantages which many workers normally
in covered employment now face because of their work during the war in
Government shipyards, munitions plants, emergency Government agencies,
and other non-covered occupations.

The new-start method would be impractical if extension is on a piecemeal
basis. More than one "new start," we believe, would be indefensible
and would tend to weaken public confidence in the program. It would be
possible to use the new-start plan, however, even though coverage is not
extended to Federal and railroad workers until later, since available
records of past employment and wages for these workers would permit crediting
their back wages. Under such an arrangement, amounts equivalent to the
contributions which would have been collected if the workers had previously
been covered under old-age and survivors insurance could be transferred
to the old-age and survivors insurance trust fund from the trust funds
for their separate Federal retirement systems.

The "new start" would result in payment of retirement benefits
to a much higher proportion of the aged during the early years of the
system, but it would not increase beneficiary rolls and costs in the later
years since the eligibility requirements would remain the same for workers
now young.

RECOMMENDATIONS ON BENEFITS

12. Maximum Base for Contributions and Benefits

To take into account increased wage levels and costs of living, the
upper limit on earnings subject to contributions and credited for benefits
should be raised from 3,000 to $4,200. The maximum average monthly wage
used in the calculation of benefits should be increased from $250 to $350
{6}

{6} While the majority of the Council favor increasing
the upper limit to $4,200, some favor keeping the limit at $3,000 and
some favor increasing it to $4,800. The reasons for these two positions
are given in appendix I-F.

A social insurance program must be adjusted periodically to basic economic
changes. In a dynamic economy, provisions which were appropriate at the
time they became effective inevitably become outmoded. This is what has
happened to the limitation placed on theamount of wages
subject to contributions and allowed as wage credits.

In 1939, when the $3,000 maximum wage base was established, nearly 97
percent of all workers in covered employment had wages of less than $3,000
a year, and thus they were required to pay contributions on their total
wages and could have their total wages counted toward benefits. Even among
workers who were steadily employed throughout 1939, fewer than 5 percent
received wages of more than $3,000 a year. With the general rise in wage
levels since 1939, however, the $3,000 limitation has tended to exclude
from taxation and use in benefit computations part of the wages of a substantial
proportion of covered workers. In 1945 about 14 percent of all covered
workers had wages exceeding $3,000, and among workers who were steadily
employed throughout the year, about 24 percent had wages in excess of
that amount.

The wage base for contributions and benefits under the program should
be higher not only because of increases in the level of wages but also
because of price increases. Since the base has not kept pace with rising
prices, benefits now supply a smaller proportion of the costs of maintaining
the beneficiary's previous standard of living than they did in 1939. Today
for example, $4,200 a year represents a somewhat lower standard of living
than $3,000 a year could purchase a decade ago. Raising the upper limit
on wages is necessary if the relationship between benefits and standards
of living which was intended in the 1939 amendments is to be maintained.

To take full account of the increase in wages and prices, the limitation
on taxable wages would have to be raised to somewhat more than $4,800.
The Council, however, recommends that a part of this increase in wages
be disregarded by changing the limitation to $4,200 as a conservative
adjustment to the rise in wage and price levels which has occurred since
the $3,000 figure was adopted. With a wage base of $4,200, about 95 percent
of the workers in covered employment in 1945 would have had all their
wages from covered employment available for benefit purposes.

If the old-age and survivors insurance program is to fulfill its function,
benefits for all insured workers must be increased. Since the American
system of relating benefits to past wages rests on the principle that
considerations of individual security and individual incentive require
a relationship between benefits and the previous standard of living of
the retired person, benefits must be increased for higher-paid wage earners
as well as for workers in the lower income brackets. Comparisons between
the primary insurance benefits payable under the plan proposed by the
Advisory Council and those payable under the present program appear in
table l. As those figures show, we recommend that a worker with an average
monthly wage of $350 (the maximum) shall have the potential protection
of a primary insurance benefit representing 22.5 percent of his average
monthly wage. Under the present program, that percentage represents the
primary insurance benefit of a worker who has earned $3,000 or more a
year and who has had 40 years of coverage.

An objective of the present law is to have workers in the highest wage
brackets covered by the system pay the costs of their own benefits over
a full working lifetime. Under the benefit formula we have recommended,
benefits for the $4,200-a-year man bear approximately the same relation
to his contributions as benefits under the present law bear to the contributions
of the $3,000-a-year man.

With the increased base, the high-paid person will have somewhat higher
benefits than he would have had if only the formula were changed, but
he will in the long run, pay for nearly all the increase in the cost of
his benefits. If the wage base is not increased, those in the higher wage
brackets will have higher benefits without having contributed toward the
cost of the increases.

13.Average Monthly Wage

The average monthly wage should he computed as under the present
law, except that any worker who has had wage credits of $60 or more in
each of six or more quarters after 1948 should have his average wage based
either on the wages and elapsed time computed as under the present law
or on the wages and elapsed time after 1958, whichever gives the higher
result

Persons whose occupations have been excluded from coverage under the
present program will suffer serious disadvantage after coverage is extended,
unless an alternative is permitted for the present method of calculating
the average monthly wage. Under the present law, benefit amounts are based
on an average computed, in general, by adding all wage credits a worker
has received for covered employment and dividing that sum by all the months
elapsing since 1936, except for quarters before the worker reached age
22 in which he received less than $50. On this basis, a worker who has
been in an employment hitherto excluded from coverage will always be penalized
for his former lack of coverage, since, in effect, his wages from newly
covered employment will be averaged over all the months elapsed since
1936 or since he reached age 22, if later. His low average wage, in turn,
will result in a low benefit amount.

The Council believes that an appropriate way to eliminate this handicap
for newly covered groups would be to have their average wages computed
from the date of the coverage extension, just as the average wage now
disregards periods before January 1, 1937, for those in employments first
covered as of that date. Since large numbers of workers have been in both
covered and non-covered employment, however, it would be almost impossible
to establish a sound basis for determining which individuals should be
treated as belonging to a newly covered group. The opportunity to profit
from the provisions designed for the newly covered groups must, therefore,
be open to all persons.

Unless previously covered workers also have the alternative of a "new
start," moreover, many will fare worse than those newly covered,
since the relatively low wages paid in the late thirties and early forties
will tend to reduce their average wages and thus yield benefit amounts
lower than those of newly covered persons in comparable jobs.

Some insured persons will have little or no covered employment after
the date coverage is extended; others will have too small an amount to
form a fair basis for determining an average; and others may have employment
after the "new start" at wages much lower than their previous
earnings. The starting point of January 1937 specified in the present
law should, therefore, be retained as an alternative and the individual
worker's average wage computed from that date if it gives a higher amount
than would the "new start."

The new start for all, on an alternative basis, appears to be the only
equitable plan, but for the reasons pointed out in the recommendation
for a new start on insured status (recommendation 11, p. 29) we do not
recommend a new start unless coverage is extended broadly as of one date.

14.Benefit Formula

To provide adequate benefits immediately and to remove the present
penalty imposed on workers who lack a lifetime of coverage under old-age
and survivors insurance, the primary insurance benefit should be 50 percent
of the first $75 of the average monthly wage plus 15 percent of the remainder
up to $275. {7} Present beneficiaries, as well
as those who become entitled in the future, should receive benefits computed
according to this new formula for all months after the effective date
of the amendments

{7} The members of the Council who favor retaining
$3,000 as the maximum annual wage credit and taxable wages would retain
$250 as the maximum average monthly wage. They advocate a primary insurance
benefit representing 50 percent of the first $75 of that monthly wage
plus 15 percent of the remainder up $175.

The benefit formula of the present program, with its automatic increase
of 1 percent for each year of coverage, in effect postpones payment of
the full rate of benefits for more than 40 years from the time the system
began to operate. Under such provisions, if the benefit amount of a retired
worker after he has had a lifetime of coverage represents a reasonable
proportion of his average wage, that for older workers who have been in
the system for only a few years and for the survivors of younger workers
will almost of necessity be inadequate. Thus, the survivors of a man who
began working at age 20 and dies at age 30 will have rights to benefits
only about three-fourths as large as those which the same average monthly
wage would have provided if he had lived to age 65. Yet the worker who
dies at an early age has had less opportunity than have older workers
to accumulate savings and other resources to supplement the benefits payable
to his survivors. The Advisory Council believes that adequate benefits
should be paid immediately to retired beneficiaries and survivors of insured
workers but considers it unwise to commit the system to automatic increases
in the benefit for each year of covered employment.

Benefits payable under old-age and survivors insurance, with the beneficiaries'
other permanent resources, should suffice to supply at least the basic
necessities of life for the great majority of beneficiaries. The present
program does not achieve this objective. Field studies made by the Bureau
of Old-Age and Survivors Insurance in 1941 and 1942 in seven cities showed
that one-third of the primary beneficiaries surveyed had insufficient
non-relief income, assets, and possible help from relatives in their household
for a maintenance level of living and that, taking account of their own
permanent resources only, nearly two-thirds of the beneficiaries had less
than was required for a maintenance budget. {8}

{8} The standard used was based on the WPA maintenance
budget. For a single man living alone it ranged from $463 in Philadelphia-Baltimore
to $505 in St. Louis. For an aged couple it ranged from $,773 to $814.
Possible aid from relatives in the household, the imputed rental value
of homes the beneficiaries owned, income from employment, and income from
the liquidation of assets were among the resources taken into account.
Since the studies were made shortly after the beneficiaries became entitled
to benefits, many of them still had incomes and resources that could not
be expected to continue in later years. For a fair picture of their economic
security, therefore, the studies attempted to differentiate between temporary
resources and those which could be considered permanent, such as old-age
and survivors insurance benefits, retirement pay, insurance annuities,
imputed rent from the homes they owned, and the estimated amounts that
could be realized from their assets prorated over their life expectancy.

Inadequate as benefits were in 1941-42, they are even less adequate now
that costs of living have increased by at least 60 percent. The average
primary benefit now being paid is only about 10 percent higher than that
paid in 1940. The table in appendix I-D shows the distribution of benefits
being paid under the present program at the end of 1947. The inadequacy
of these benefits is self-evident.

The benefit formula in the present Social Security Act provides a primary
benefit representing 40 percent of the first $50 of the average monthly
wage and 10 percent of the next $200. It is thus weighted in favor of
workers whose average wages are low. As a result of increases in wage
rates, the effect of the original weighting, however, has been substantially
reduced. In 1939, when the program was drafted and approved, $50 represented
about one-half the average monthly earnings of fully employed persons
in covered employment. By 1947, fully employed workers were receiving
an average of about $185 a month. As a conservative recognition of the
effect of wage increases on the original weighting, the Council recommends
a change in the benefit formula to make $75 the upper limit for that part
of the average monthly wage to which the higher percentage is applied.

This change, however, will not in itself sufficiently increase the primary
benefits of low-wage workers. Many beneficiaries now on the rolls receive
benefits based on an average monthly wage of less than $75. These beneficiaries
and others in the future whose benefits are based on low wages lack outside
resources and should not be denied the right to more liberal benefits.
If the benefit formula gave 50 percent, rather than 40 percent, of the
first $75 of the average monthly wage, the beneficiaries whose rights
are based on low wages would receive fairly substantial increases in their
benefit amounts.

We also propose that the percentage applied to the portion of the averagewage above $75 be increased to 15 percent. If that percentage
remains fixed at 10 percent, there will be too little spread between the
benefit amounts of low-income. and high-income workers. Thus, for an average
monthly wage of $100, the primary benefit would be only $10 less than
that for an average wage of $200, a differential that we believe is insufficient
for the wage interval of $100-$200, which now includes the great majority
of workers in covered employment.

We believe that benefits should be related to the continuity of the worker's
coverage by and contributions to the system, as well as to the amount
of his earnings. Under our recommendations, accordingly, benefits will
continue to vary--as they now do--with both these factors. Thus, in figuring
the average monthly wage (recommendation 13, p.33), a worker's total wage
credits are--and would continue to be--divided by the total number of
months that he might have been contributing to the system. His average
wage, and consequently his primary benefit, will therefore be the smaller
for each month lacking in his record of covered employment. In our opinion,
this method of adjusting benefits permits sufficient differentiation between
workers who are steadily employed in covered jobs and those whose covered
employment is only brief or intermittent. Thus, an increment is not needed
for the purpose of such differentiation

With coverage broadly extended, the increment would serve largely to
reward younger workers for their greater contributions by paying them
higher retirement benefits than those paid to persons who were old when
the system started. To us, such discrimination seems undesirable. The
older worker should not be penalized for the fact that he could not contribute
throughout his life. We propose, in effect, that, as in many private pension
plans, the older worker receive credit for his past service and acquire
rights to the full rate of benefits now.

A major draw-back in liberalizing a benefit formula that contains an
increment lies in the danger that benefits in future years will be excessively
high. By eliminating the increment, the benefits paidnow
can be more adequate than would seem feasible if the level of benefits
were also to be raised automatically in future years by the application
of an increment in the formula.

15.Increased Survivor Benefit

To increase the protection for a worker's dependents, survivor benefits
for a family should be at the rate of three-fourths of the primary insurance
benefit for one child and one-half for each additional child, rather than
one-half for all children as at present. The parent's benefit should also
be increased from one-half to three-fourths. Widows' benefits should remain
at three-fourths of the primary insurance benefit

Adoption of this recommendation would serve mainly to provide higher
benefits for children of deceased workers, since few parents of insured
workers are eligible for benefits. Families consisting of young children
and widowed mothers would benefit particularly from this recommendation.
Studies made by the Bureau of Old-Age and Survivors Insurance in 1940-42
indicate that this beneficiary group is the one most in need of benefit
increases. Of the widows with entitled children, 44 percent--a 1arger
percentage than for any other beneficiary type--were found to have insufficient
income for a maintenance level of living {9}
and had net assets of less than $2,500. Of the widows with three or more
children, 73 percent had to live below this maintenance level.

{9} The standard used in this study was based on the
WPA budget for a maintenance level of living and was found to have been
very close to the relief standard. In the cities investigated, it ranged
from $1,052 a year in Philadelphia-Baltimore to $1,145 in Los Angeles
for a widow and two children (aged 10 to 15).

Under the present program, the benefit rates of family groups of the same
size vary, before the application of the maximums, in ways unrelated either
to need or to insurance principles. There are three types of monthly benefits,
in addition to the primary insurance benefit, which an individual may
receive without other benefits being payable in the same family group.
An aged widow as a sole beneficiary receives three-fourths of the primary
insurance benefit, and the survivor benefit payable to one child or to
one dependent parent of a deceased insured worker equals one-half the
primary benefit. Family groups with two beneficiaries may receive one
and one-half times the primary benefit (husband and wife), one and one-fourth
times the primary benefit (widow and child), or the same amount as the
primary benefit (two children or two dependent parents). Families with
three beneficiaries may receive twice the primary benefit (retired worker,
wife and child), or one and three-fourths times the primary benefit (widow
and two children), or one and one-half times the primary benefit (three
children).

There is no good reason for these differentials in benefit rates. TheCouncil's recommendation would result in a uniform ratio to the
primary benefit for all survivor benefits paid to a sole beneficiary and
for all two-person and three-person beneficiary groups, except for those
consisting only of children.

16.Dependents of Insured Women

To equalize the protection given to the dependents of women and men,
benefits should be payable to the young children of any currently insured
{10}woman upon her death or eligibility
for primary insurance benefits. Benefits should be payable also (a) to
the aged, dependent husband of a primary beneficiary who, in addition
to being fully insured, was currently insured at the time she became eligible
for primary benefits, and(b) to the aged, dependent
widower of a woman who was fully and currently insured at the time of
her death

{10} To be currently insured, a worker must have had
6 quarters of coverage within the period consisting of the quarter in
which he died and the 12 quarters immediately preceding such quarter.

Under the present program, insured women lack some of the rights which
insured men can acquire. Thus, when an insured married woman dies or retires,
monthly benefits can seldom be paid to her children on the basis of her
wage record and are never payable to her husband. If she has been working
steadily before her death or retirement, the Council believes her participation
in the insurance program should carry protection against the loss of her
earnings, which presumably have been an important part of the family income.

The changes proposed by the Council would mainly affect orphaned children.
At present, young children of a deceased insured woman canreceive
monthly benefits based on her wage record only if the father has died
or if the child was not living with his father and had been supported
by his mother. Under our proposal, monthly benefits would be payable to
the young children of any woman who died currently insured, in recognition
of the fact that the earnings of a working wife are an important contribution
toward the support of the family.

Supplementary child's benefits should be payable to the young children
of any retired woman who was currently insured when she attained age 60.
If both husband and wife are primary beneficiaries, however, the child
would receive only the benefits based on the larger of the two wage records.
In the majority of such instances, the child's benefits would thus be
based on the father's wage record rather than on the mother's, but the
mother's insurance should be the basis of the benefit if it would yield
a larger addition to the family's benefit income. Since very few women
aged 60 or over have children under age 18, however, supplementary child's
benefits will be payable with respect to retired women in relatively few
cases.

We also believe that a widower who was dependent on his fully and currently
insured wife at the time of her death should receive a benefit based on
her wage credits when he attains age 65, but as is now the case for aged
widows, he should receive his widower's benefit only if it is larger than
the primary benefit based on his own earnings.

Similarly, supplementary benefits should be payable to the dependent
husband (at age 65 or over) of a female primary beneficiary who was currently
insured at the time she attained age 60. These husband's benefits would
be comparable to the present wife's benefits for wives of male primary
beneficiaries. Such benefits will be payable in relatively few cases,
however, because the man would receive only the larger of the husband's
benefit or his own primary benefit.

Except in the case of family situations in which supplementary or survivor
benefits are payable under present law, we advocate that supplementary
or survivor benefits be payable only on the wage record of a woman who
was currently insured on her attainment of age 60 or her death. A woman
who has not worked in at least half the calendar quarters of the 3 years
immediately preceding her retirement or death is not likely to have been
responsible for even partial support of her family. If she is fully but
not currently insured, all her gainful employment will in most cases have
antedated her marriage or the birth of her children, and her death will
mean no loss of income for the family.

The cost of paying the proposed supplementary and survivor benefits to
dependents of women workers will be very small. Relatively few aged dependent
husbands and widowers or children of retired women workers will qualify
for benefits, for most of the men will be eligible for higher primary
benefits in their own right and few aged women have children under 18.
Although benefits to children of deceased insured younger women will be
paid more frequently, they will cost considerably less than 0.1 percent
of pay rolls.

17.Maximum Benefits

To increase the family benefits, the maximum benefit amount payable
on the wage record of an insured individual should be three times the
primary insurance benefit amount or 80 percent of the individual's average
monthly wage, whichever is less, except that this limitation should not
operate to reduce the total family benefits below $40 a month

The Advisory Council believes that the wife of a retired beneficiary
and each of his children under age 18 should receive 50 percent of the
primary insurance benefit, the same proportion as under the present program.
According to recommendation 15 (p. 37), however, the widow and the first
child of a deceased insured worker would each receive 75 percent of the
primary insurance benefit, while each additional child would receive 50
percent. The total monthly amount of benefits payable when deceased insured
workers leave very large families might thus be excessive unless some
maximum limits the total monthly amount of benefits payable on the basis
of a single wage record.

Under present law, whenever the total of all monthly benefits payable
with respect to the wage record of an individual exceeds (1) $85, or (2)
twice the primary benefit amount, or (3) 80 percent of the wage earner's
average monthly wage, the total must be reduced to the least of these
three. These limitations, however, do not operate to reduce the total
family benefits below $20 a month.

The increase in the wage base (recommendation 12, p. 31) and the changes
in the benefit formula (recommendation 14, p. 34) which the Council has
recommended make the $85 maximum too restrictive. The average primary
insurance benefit under our proposals will be about $50 and the maximum
primary insurance benefit will be $78.75. At higher levels of average
monthly wages (about $200), full benefits could not be paid to the wife
of a primary beneficiary or to a widow and one child if the $85 maximum
were retained. If the primary beneficiary also had a minor child, full
benefits could not be paid to the family even at average monthly wages
of about $110. The majority of family benefits would be reduced by this
dollar maximum, and much of the value of a family benefit system would
be lost. To maintain a proper recognition of family need, the $85 maximum
limitation must be removed.

Moreover, it is unnecessary in our opinion to place any specific dollar
limit on the benefit amount. The other maximums we propose will serve
to keep benefits at reasonable levels. The highest payments that can be
made under our proposals are justified by the large amount of the worker's
contributions as well as by the large number of his dependent survivors.

The maximum of 80 percent of the average monthly wage should be retained.
The Council is convinced of the soundness of the principle that social
insurance benefits should be less than the former wages of the worker
covered by the program. This principle, however, should not be applied
to reduce total family benefits below $40 a month. A widow and two children
should receive an amount based on the full minimum primary benefit (recommendation
]8, p. 41), as they can at present, even though the amount exceeds 80
percent of the insured worker's average monthly wage.

The Council recommends an additional maximum of three times the primary
benefit. The present maximum of twice the primary benefit is too restrictive.
It reduces the family benefits of larger families in the moderate income
groups more sharply than do either of the other maximums in the present
program. Probably few groups for whom more liberal benefits should be
recommended are in greater need of additional income than are these larger
families. The hardship to the children is intensified by the fact that,
by their very numbers, they have limited their parents' ability--to make
other savings from their moderate wages.

The cost of raising the maximum benefit payment from twice the primary
insurance benefit to three times that benefit will not be great. This
maximum will seldom affect a family containing a retired worker for it
can apply only if he has a wife entitled to wife's benefits and more than
one minor child, or if he has three minor children. Among families of
survivor beneficiaries, only about 6 percent are large enough to receive
more in benefits under the maximum of three times the primary benefit
than under a maximum of twice the primary. {11}
This 6 percent, however, includes more than 20 percent of the survivor
families in which children are entitled to benefits. The liberalization
we propose would be extremely significant to the welfare of the relatively
small number of families it would affect.

{11} A maximum of twice the primary benefit would
apply to survivor benefits when the deceased insured worker leaves a widow
and three or or more minor children or more than three minor children
and no widow.

Under our proposals, in no case will any group of survivors receive more
than 80 percent of the average monthly wage, unless entitled to the minimum
benefit, and when that average wage exceeds $225, our proposed maximum
of three times the primary insurance benefit will become effective and
will reduce the total monthly benefits for the family below 80 percent
of the average wage.

18.Minimum Benefit

The minimum primary insurance benefit payable should be raised to
$20

The present minimum primary benefit of $10 is too small to serve any
social purpose. If the coverage of the program is extended to include
nearly all types of gainful employment, this minimum should be raised
to $20. With a $20 minimum primary benefit a widow, parent, or the first
child survivor beneficiary in a family would receive minimum monthly benefits
of $15, and a wife or any child beneficiary after the first would have
a minimum monthly benefits of $10.

The minimum benefit is necessarily limited by the previous standard of
living of the lowest wage group covered by the program, for it seems undesirable
to pay social insurance benefits which would give retired persons a higher
income than they previously had, or enable them to maintain a higher standard
of living than is possible for others in the community who are employed
at work comparable to that on which the benefits are based. A social insurance
system cannot appropriately attempt to correct, after retirement, the
basic problems of low living standards stemming from inadequate wages
and sporadic employment.

Taking account of the areas where living standards and costs are the
lowest and the fact that, in general, retired persons need less money
than those who are employed, $20 for a single person and $30 for a couple
is probably as high a minimum as could reasonably be allowed at the present
time. These amounts, of course, are hardly large enough to meet the full
cost of subsistence in any part of the country and are far below the amount
needed in most parts of the United States. Only a variable benefit related
to previous wages and living standards on an individual basis can provide
benefits which are significant for the higher-paid workers, without at
the same time exceeding the previous earnings of some insured workers.

In a program in which the benefits represent a reasonable proportion
of past wages, the minimum will be paid to very few persons, particularly
if coverage is nearly universal. Even under the present method of computing
benefits and the present limited coverage, persons at the minimum primary
benefit levels a few decades hence would usually be married women who
left covered employment after becoming permanently insured or individuals
whose covered employment was part-time or intermittent.

Under the benefit formula recommended by the Council (recommendation
14, p. 34), those whose average monthly wage was at least $40 would receive
at least $20 without operation of the minimum. Over a lifetime, nearly
all persons would average wages of more than $40 a month or would be dependent
on persons who did. Consequently, only a few persons would have to have
their computed benefit raised to the minimum of $20. The minimum, however,
would make a significant contribution toward the living expenses of the
few beneficiaries who otherwise would receive a smaller amount, and would
aid in promoting the program's objective of reducing old-age dependency
to the extent that it is feasible for an insurance system to do so for
short-term or very low paid workers.

The Council's recommendation on this point is conditioned on broad extension
of coverage, because otherwise many persons would work for only short
periods in covered employment and receive the relatively high minimum
benefit. Workers who contribute regularly to a system of limited coverage
should not be required to subsidize short-term workers to the extent which
would result if the increased minimum were paid under limited coverage.

A $20 minimum coupled with broad coverage would help provide a basic
security at no significant additional costs and without destroying the
range in benefits whereby an individual's equity in the system is related
to the amount of wages he receives from covered employment.

19.Retirement Test

No retirement test (work clause) should be imposed on persons aged
70 or over. At lower ages, however, the benefits to which a beneficiary
and his dependents are entitled for any month should be reduced by the
amount in excess of $35 which he earns from covered employment in that
month. Benefits should be suspended for any month in which such earnings
exceed $35 but, each quarter, beneficiaries should receive the amount
by which the suspended benefits exceeded earnings above the exemption

The larger the proportion of aged persons who find suitable employment,
the greater the output of goods and services, and consequently the higher
the standard of living in the community. In the opinion of the Advisory
Council, accordingly, the work clause should not be designed to encourage
persons to cease all gainful work. The chief purpose should be to prevent
the payment of benefits to persons who continue working for wages at or
near the level of those earned during much of their working lives; such
persons have not suffered the loss of earnings against which the system
insures.

The Council recognizes that the great majority of retirements are involuntary.
Most workers want to continue working after age 65 even though their earnings
are small. The work clause should therefore be liberalized to encourage
those who can earn moderate amounts which will contribute toward their
support to do so without being entirely deprived of old-age benefits.
The fact that opportunities to work in non-covered employment will be
practically eliminated by extension of coverage is an additional reason
for liberalization.

The present program calls for suspension of benefits for any month in
which the beneficiary earns wages of $15 or more in covered employment.
When a primary beneficiary works, dependents' benefits are also suspended.
We propose that monthly earnings of $35 or less should be permitted without
reduction of benefit income.

The present provision, or any work clause which requires suspension of
benefits for earnings in excess of a specified amount, may in some instances
mean that a beneficiary has a smaller total income when he works than
when he remains unemployed or does a small amount of work. This will result
whenever he earns more than the exempt amount but less than the sum of
that amount and the total benefits to which he and his dependents are
entitled.

The Council believes that beneficiaries should not have their total income
reduced because of work. Otherwise some beneficiaries may refrain from
taking jobs because the only opportunities available to them would pay
an amount which would result in an income loss. Furthermore, beneficiaries
who take jobs will run the risk of income loss if they are unable to continue
working until they have earned more than the exempt amount plus their
benefits. To prevent the possibility of such losses, we propose that the
beneficiary should forego only as much of his benefits as the amount by
which his earnings exceed the exemption of $35 a month.

We recommend that the beneficiary earning more than $35 in a month should
be required to report to the Social Security Administration the amount
of his wages in that month. The Social Security Administration should
then suspend his benefit. After the Administration receives the employer's
quarterly tax return, adjustments should be made if necessary. If the
amounts reported by the beneficiary for the 3 months in the quarter agree
reasonably with the total quarterly wages shown for him on the employer's
return, payment should be made of as much of his monthly benefits for
the 3 months in question as exceeds the difference between his earnings
in each of the 3 months and the exemption. Ordinarily, of course, a full-time
worker will be getting wages high enough so that no adjustment need be
made. This would be true if his earnings were more than the exempt amount
plus his benefits. If the amounts reported by the beneficiary do not agree
with his total quarterly wages shown on the employer's return and adjustments
are necessary, the employer should be asked for a monthly break-down of
the reported wages, and adjustments would be made on the basis of the
information furnished. In view of the annual reports of the self-employed,
some modification would have to be made in the application of the work
clause to them.

Full benefits should be paid to all beneficiaries who are aged 70 or
over, regardless of their earnings. Many old-age insurance beneficiaries
undoubtedly consider any work clause a hardship and restriction on their
freedom of activity. In our opinion, the savings effected by a work clause
for beneficiaries who are 70 years old or more would not be significant
enough to outweigh the advantage of giving some recognition to the beneficiary's
desire to receive benefits without qualification. The cost of eliminating
the work clause at age 70 would be about one-third of the estimated cost
of removing it for all beneficiaries. Obviously, however, not all the
cost of eliminating the work clause at age 70 would be a net burden on
the community. To the extent thatbeneficiaries would
be encouraged to continue working, the elimination of the work clause
would increase the output of goods and the utilization of the plant and
equipment of industry.

The social-insurance system of the future will probably have to take
into account, more than does the present one, both the need for the economic
contribution of the aged and their desire to make that contribution. We
suggest that the Federal Government establish a commission to study the
broad problem of the aged in our society including employment opportunities
and the adjustment of the aged to retirement. This study might well furnish
the basis for additional changes in the retirement provision of the old-age
and survivors insurance program.

20.Qualifying Age for Women

The minimum age at which women may qualify for old-age benefits (primary,
wife's, widow's, parents) should be reduced to 60 years

Under the present program, 65 is the qualifying age for all aged beneficiaries--wives,
widows, dependent parents, and retired workers. The Council recommends
that the age requirement for women be reduced to 60.

Until a retired worker's wife reaches age 65, no wife's benefits are
now payable. In most instances, the husband's retirement benefit and other
family resources are inadequate to maintain the family. Surveys indicate
that the proportion of beneficiary families with retirement income and
other assets sufficient for a maintenance level of living is substantially
less among those in which the wife is not entitled to a wife's benefit
than among those in which she is so entitled. Although less than one-fifth
of the married men who attain age 65 have a wife of the same age or older,
more than half have a wife who has reached age 60. Since many workers
do not retire until several years after attaining age 65, a reduction
of the age requirement for wife's benefits to age 60 will permit the wives
of about three-fourths of the married men who claim primary or retirement;
benefits to receive wife's benefits as soon as their husbands retire.

Women aged 60 or over find it practically impossible to get a job unless
they have recently been employed. Aged widows and aged dependent mothers
of deceased insured workers therefore should also be able to qualify for
benefits at age 60. If the age requirement for women were reduced to 60
years, about two-fifths of the insured workers' widows without minor children
in their care would be eligible for benefits immediately. {12}

{12} Widows caring for a minor child of a deceased
insured worker can draw benefits at any age.

If the age requirement for wives, widows, and aged dependent mothers
of insured workers is lowered to 60, the same qualifying age should also
apply to women who become primary beneficiaries through their own covered
employment. If insured women are not made eligible for retirement benefits
at age 60, benefits would be payable at an earlier age, and thus for a
longer life expectancy, to the wife, widow, or mother of an insured worker
who had not herself contributed directly to the program, than to a woman
worker who had perhaps paid contributions for many years.

21.Lump-Sum Benefits

To help meet the special expenses of illness and death, a lump-sum
benefit should be payable at the death of every insured worker even though
monthly survivor benefits are payable. The maximum payment should be four
times the primary insurance benefit rather than six times as at present

The present provision for lump-sum benefits, which allows for a payment
only if no survivors are immediately eligible for monthly benefits, evidently
developed primarily from the idea of guaranteeing some return for the
contributions insured workers had paid. The lump sum would serve a more
useful purpose than it now does if it were payable for all deceased insured
workers, regardless of the monthly benefits that might also be paid at
the same time.

Monthly benefits for survivors provide only a partial replacement of
the income earned by the deceased worker and are needed to meet current
living expenses. No allowance is made in these monthly payments for such
expenses as the cost of the last illness and burial. The need for a lump-sum
death payment is therefore fully as great when monthly benefits are payable
as when they are not. In fact, when survivors are immediately entitled
to monthly benefits, the need for a lump-sum payment may be even greater
than in other cases, since these survivors are persons who are presumed
to have been currently dependent on the wages of the deceased worker.

The increase in the primary insurance benefit which the Council has recommended
(recommendation 14, p. 34) would automatically result in a substantial
increase in the lump-sum payment if the present formula of six times the
primary insurance benefit were retained for lump-sum payments. We do not
recommend a general increase in the dollar amounts of the lump-sum payment
and therefore believe that the formula should be reduced to four times
the primary insurance benefit.

The lump sum should be payable, as at present, to a spouse if such spouse
were living with the deceased insured worker at the time of his or her
death. If no spouse survives, the payment should be made to the person
equitably entitled to such payment on the basis of having paid the funeral
expenses. In this event the amount should be limited to the funeral expenses,
if such expenses were less than, the maximum of four times the primary
insurance benefit.

RECOMMENDATIONS ON FINANCING

22.Contribution Schedule and Government Participation

The contribution rate should be increased to 1.5 percent for employers
and 1.5 percent for employees at the same time that benefits are liberalized
and coverage is extended. The next step-up in the contribution rate, to
2 percent on employer and 2 percent on employee, should be postponed until
the 1.5 percent rate plus interest on the investments of the trust fund
is insufficient to meet current benefit outlays and administrative costs

There are compelling reasons for an eventual Government contribution
to the system, but the Council feels that it is unrealistic to decide
now on the exact timing or proportion of that contribution. When the rate
of 2 percent on employers and 2 percent on employees, plus interest on
the investments of the trust fund, is insufficient to meet current outlays,
the advisability of an immediate Government contribution should be considered.

The present rate of contributions of 1 percent payable by employers and
1 percent by employees has remained unchanged for more than 10 years.
If benefits and eligibility requirements are liberalized as the Council
recommends, the contribution rate should be raised to 1.5 percent each.
This increase is desirable to promote public understanding of the fact
that, in the long run, a close relationship exists between the rate of
contribution and the size of benefits. It is desirable also to permit
spacing, more or less evenly, small increases in the rate of contributions
as they rise to their ultimate level. It is also fair because, at present
rates, contributions fall far short of covering the value of the benefit
rights that workers are acquiring.

The step-up to 2 percent should be postponed until actually needed. The
Council believes that the excess of income over outgo, inevitable in the
early years of the program, should be kept as low as is consistent with
the contributory character of the program. Even with the increase to 1.5
percent, assets of the trust fund may rise for a few years at an annual
rate of about $2,000,000,000.

For the reasons given above, the Council believes that the first step-up
is needed when the liberalized program becomes effective, but we wish
to emphasize that building up the trust fund is not the purpose of our
proposed increase in the contribution rate, and we therefore urge that
additional increases in the rate be postponed. The increase in the trust
fund is an incidental result of the contribution rates, the benefit rates,
and the eligibility requirements that seem to us desirable on other grounds.
Unlike private insurance, a social-insurance scheme backed by the taxing
power of the Government does not need full reserves sufficient to cover
all liabilities.

Some people fear that additions to the trust fund will have adverse effects
on the economy. Whether the economic effects of additions to the trust
fund are good or bad will depend on the general economic situation and
on the fiscal policies of the Government. In any circumstances, an annual
surplus for a few years of as much as $2,000,000,000 would not, in our
opinion, be unduly large or unmanageable; in fact, such a surplus would
be small in comparison with the amounts involved in many recent financial
operations of the Government. On the other hand, the Council sees no reason
to increase this surplus even further by moving to the 2 percent rate
before the demands of the system actually call for such an increase.

The Council believes that the Federal Government should participate in
financing the old-age and survivors insurance system. A Government contribution
would be a recognition of the interest of the Nation as a whole in the
welfare of the aged and of widows and children. Such a contribution is
particularly appropriate, in view of the relief to the general taxpayer
which results from the substitution of social insurance for part of public
assistance.

The old-age and survivors insurance program starts with an accrued liability
resulting from the fact that, on retirement, the present members of the
labor force will not have contributed toward their benefits over a full
working lifetime. Furthermore, with the postponement of the full rate
of contributions recommended above, even young people who enter the labor
force during the next decade will not pay the fullrate
over a working lifetime. If the cost of this accrued liability is met
from the contributions of workers and their employers alone, those who
enter the system after the full rate is imposed will obviously have to
pay with their employers more than is necessary to finance their own protection.{13}
In our opinion, the cost of financing the accrued liability should not
be met solely from the pay-roll contributions of employers and employees.
We believe that this burden would more properly be borne, at least in
part, by the general revenues of the Government.

{13} It is estimated that the cost of the protection
for a generation of workers under the program for a full working lifetime
would be from 3 to 5 percent of pay roll, while the level premium cost
of the whole systemincluding
the accrued liability, is from 4.9 to 7.3 percent of pay roll.

Old-age and survivors insurance benefits should be planned on the assumption
that general taxation will eventually share more or less equally with
employer and employee contributions in financing future benefit outlays
and administrative costs. The timing and exact proportion of this contribution,
however, cannot be decided finally now. They will depend in part on the
other obligations of the Government and the relationship between such
obligations and current income. We believe that a Government contribution
should be considered when the 2-percent rate for employer and employee
plus interest on the investments of the trust fund is insufficient to
meet current costs. To increase the pay-roll contributions above the 2-percent
rate before the introduction of a Government contribution might mean that
the Government contribution would never reach one-third of eventual benefit
outlays, since under our low-cost estimates the annual cost of the benefits
never exceeds 6 percent of pay roll even though it reaches 9.7 percent
under the high estimate.

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